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Can You Get A Home Loan With Bad Credit?

It is possible to get a home loan with bad credit with an FHA loan. They require a 500-579 credit score if you have 10% to put down and a 580 minimum credit score with just 3.5% down. Currently, with the economy struggling due to covid, FHA lenders are not providing loans to borrowers with credit scores below 580. Even with a 580 to 620 credit score, you will need some compensating factors to make up for having a lower credit score.

Minimum Credit Score Requirements by Loan Type

Your credit score is the most important factor in determining if you qualify for a loan. The credit score you need to get a mortgage will depend on the lender, your down payment, and the type of mortgage you apply for.

Minimum Credit Score by Loan Type

FHA Loans – Minimum 580 credit score

FHA loans are guaranteed by the Federal Housing Administration and issued by private lenders. You need a 580 credit score to buy a house using an FHA loan. A 10% down payment is required for borrowers with at least a 500 score.

VA Loans – Minimum 580 credit score

Veterans of the military are eligible for VA loans. The Department of Veterans Affairs does not do not have a minimum credit score requirement to guarantee a loan. Lenders use their own credit requirements. The minimum credit score most VA lenders require is between 580 and 620.

USDA Loans – Minimum 620 credit score

USDA Loans are for low-to-median income borrowers who plan on buying a home in USDA-eligible rural areas of the country. They are guaranteed by the US Department of Agriculture and offer 100% financing, They do have income limits, your income cannot exceed 115% of the area median income (AMI). You need a 620 credit score to be eligible.

FHA 203k Loans – Minimum 580 credit score

If you want to buy a home that needs repairs you can get a loan for the purchase of a home plus the cost of making repairs with a section 203k loan. They require a 620 credit score and a 3.5% down payment.

Conventional loans – Minimum 620 credit score

A conventional loan is not guaranteed by the government but by private mortgage insurance companies. They require a 620 credit score and a down payment between 5% to 20%. If you plan on putting at least 20% down you won’t need to carry mortgage insurance.

Home Possible / HomeReady Loans – Minimum 620 credit score

Fannie Mae and Freddie Mac created low down payment home loan programs for low-income first-time homebuyers. To be eligible for the HomeReady or Home Possible mortgage programs your income must be below 100% of the area median income. They require just a 3% down payment with a minimum 620 credit score.

Conventional 97 Loans – Minimum 680 credit score

A conventional 97% LTV loan finances 97% of the purchase price of a home. There are no income limits, a 680 credit score is required with 3% down.

Jumbo Loans – Minimum 680-700 credit score

If you need a loan that exceeds the conforming loan limit you will need a jumbo loan. Because of the high loan amount, Jumbo loans present more risk to lenders, requiring at least a 700 credit score with a 10% to 20% down payment.

Compensating Factors for Poor Credit

If you have bad credit the rest of your mortgage application needs to make up for it with a low debt-to-income ratio or large down payment. Lenders call these compensating factors, things that compensate for having poor credit. They reduce the lender’s risk, allowing them to approve borrowers with low credit scores.

Compensating Factors

  • Limited payment shock
  • 5+ years with the same employer or in the same industry
  • High income
  • Large amount in savings
  • 20% down payment
  • Low debt-to-income ratio below 36%
  • Residual Income
  • Limited debt (credit cards, auto loans, etc.)

How Your Credit Score is Calculated

How Your Credit Score is Calculated

35% Payment History

Payment history is how well you pay your bills on time. This includes late payments and collection accounts.

30% Credit Utilization

The amount of available credit you're using is called your credit utilization ratio. Try to keep your credit utilization ratio below 25%.

15% Length of Credit

The longer your accounts stay open, the better your score will be. Don't close credit cards is possible.

10% Types of Credit

A mix of credit accounts such as credit cards, auto loans, mortgages will help improve your credit score.

10% Credit Inquiries & New Accounts

When a lenders pulls your credit it creates a hard inquiry. Multiple inquiries hurt your score count against you for 12 months.

What Lenders Look at Besides Your Credit?

A mortgage lender will look at more than just your credit rating; they look at the whole credit picture. Negative credit history, such as late payments, collection accounts, or excessive debt, could cause your loan to be denied.

Credit Guidelines

  • No more than one late payment in the last 12 months
  • No late mortgage payments
  • 36 month waiting period after a bankruptcy or foreclosure
  • Limited unpaid debt in collections

How Your Credit Score Affects Your Mortgage Rate

Your credit score is directly tied to the interest rate you receive on a loan. Bad credit leads to a higher mortgage rate and increased closing costs, meaning a higher monthly mortgage payment. Borrowers with a higher credit score will get the best interest rates and loan terms. 

  • 579 and lower – If you are approved for a mortgage with this low of a score, you will have a credit score as much as 2% higher than the current lowest rate.
  • 580-619 – You can expect an interest rate as much as 1% higher than the lowest rates available.
  • 620-679 – With a credit score in this range, your interest rate will be slightly affected. Rates could be .5% higher than someone with great credit will receive.
  • 680-739 – This is the range most homebuyers are at; your rate will not be affected much at all in this range.
  • 740 and higher – You will be offered the best rates mortgage companies have to offer.

Tips to Improve Your Credit Before Applying

  • Check Your Credit For Errors: The first thing you should do is get a copy of your credit report from all three major credit bureaus. You can get a free copy of your credit reports from the government website www.annualcreditreport.com
  • Pay down credit card debt – Your credit utilization ratio is the percentage of available credit you’re using on your credit cards. Credit utilization ratios account for 30% of your credit score. The more credit card debt you have, the lower your credit score will be. Try to pay your credit card balances to below 30% of the card’s credit limit before applying for a mortgage.
  • Pay your bills on time – your payment history determines 35% of your overall FICO score. A single late payment can have a significant impact on your score. Remember to pay your bills on time. Set up auto-pay if you find yourself forgetting to make your payments.
  • Negotiate a “Pay for Delete” settlement with creditors – If you have any collections on your credit report, they are obviously having a significant negative impact on your credit score. You can contact the collection agencies directly and ask them if they will do a pay for delete. A pay for delete is an agreement that you agree to pay the balance, and in return, the creditor agrees to remove the account from your credit report.